LTL Special Report: Rising out of the doldrums

The much-beleaguered less-than-truckload (LTL) sector, which has been the slowest part of the trucking industry to recover from the Great Recession, is showing signs of life. Because of that, LTL shippers should be bracing themselves for higher rates and tighter capacity as LTL operators are showing greater pricing discipline amid the toughest government oversight since trucking was economically deregulated in 1980.

The $31 billion LTL industry enjoys the distinction of being the only niche in trucking with significant barriers to entry. After all, truckload (TL) carriers running from point to point don’t need the sophisticated hub-and-spoke terminal networks that are the backbone of LTL operations. They only need a truck, a driver, and a customer.

LTL carriers operate differently. They have made significant investments on brick-and-mortar terminals and breakbulk facilities—the heart of their huband-spoke systems that are difficult to replicate. With this, there have been no significant entrants in the LTL sector in decades, allowing LTL carriers to charge higher rates than truckload. They’re beginning to price their services in smarter and more sophisticated ways, analysts say, charging extra for such services as home delivery, appointments, and freight with special equipment needs.

LTL carriers are also enjoying greater price discipline and boldness than they’ve displayed in several years. Already, LTL giants UPS Freight and ABF Freight System have signaled this new pricing acumen by announcing mid-year general rate increases of 6.9 percent, and others are expected to follow.

“The health of the LTL sector is better than it was a year ago,” says Satish Jindel, principal of Pittsburgh-based SJ Consulting, a firm that closely tracks pricing in the industry. “That’s because carriers are at the end of their rope in accepting sub-par operating margins.”

Because of pricing discipline and capacity restrictions, stock analysts are more bullish on LTL carriers than they have been in at least five years. David Ross, the respected trucking analyst for Stifel Nicolaus, has “buy” ratings out on a half-dozen LTL companies currently—Vitran, Saia, Roadrunner, ABF Freight System (largest unit of Arkansas Best
Corp.), Old Dominion Freight Line, and Con-way. He has a “sell” rating on just one carrier, financially troubled LTL giant YRC Worldwide, which despite $2.6 billion in losses the past five years, recently obtained a new $500 loan facility which should enable it to continue and perhaps invest in its operations.

“The question will be how disciplined the carriers can be in keeping a firm stance in rate negotiations and how disciplined they will be in adding capacity,” Ross advised in a recent note to investors. “We believe that a firm stance in pricing should lead to discipline with capacity additions.”

So, as the LTL sector prepares to capitalize on its improving profit margins, what do LTL shippers need to know?